Before you can begin to control expenses en route to lowering them, you must know where your money is going. Numerous financial management programs are available to help you keep track of your expenses, but they won’t help unless you or your business manager enters the proper information.
When faced with a huge differential between expenses and revenue, businesses may be forced into restructuring to create significant, long-term savings. Rather than take on such a major task, businesses initially may look at small cost-saving methods, such as reducing travel expenses, conserving office supplies, and taking additional steps.
Improving efficiency has long-lasting benefits beyond reducing costs because it can also help the company run more productively and deliver better service to customers.
Although business expenses can be reduced in a number of ways, eliminating inefficient processes and wasteful spending should be a top priority. Without improving existing operations, the savings experienced from a superficial cost reduction, or even a major restructuring of the company, may be short-lived.
Equip your workforce with the tools and information they need to help control expenses and pursue revenue-generating activities to grow the company.
Common cost cutters a like reducing personnel and inventory can cost you more than they save. Cut personnel and you reduce personal service to customers. Cut inventory and you create unsatisfied customers.
So, what can you do?
Eliminate the time and cost associated with writing checks by using a business credit card or Automated Clearing House (ACH) payments. Emailing invoices and accepting credit card or ACH payments can eliminate the paper and postage costs of mailing bills. Electronic billing also saves time and effort, reduces labor expenses and accelerates cash flow.
“Don’t credit cards carry a fee?” you may ask. They do, but they also offer the security of guaranteed funds, unlike checks.
One of your company’s top expenses may be your supply and service vendors. Moving your company’s business to a single supplier or service vendor could present discounts on services, offering even greater efficiency. Using the same company for print and mailing house services, for instance, can reduce expenses, particularly if you renegotiate prices frequently.
Get vendors to compete for your business and let them know you’re soliciting bids from others. This will help ensure you get the best prices.
Consolidating supply and service vendors and standardizing contracting processes can help companies eliminate redundancy and overcharging. Some communities feature local buying organizations that gather all the local businesses in the area and use their collective buying power on behalf of all the members.
Make an annual or semi-annual review of all your key vendors a standard practice in your company. Also, make sure you flag all automatically renewing contracts to pop up for review and rebidding 60 to 90 days before their expiration date.
Practice fiscal discipline
As the owner of a successful business, you may feel entitled to drive a fancy car, travel first class on your company’s dime, and have a huge expensive office with overstuffed chairs, but you may be sending the wrong message to your employees. Making smart and frugal choices will let you team know that excessive spending is not okay, while inducing them to help keep expenses in check.
Also, encourage employees to submit cost-cutting ideas regularly and reward them with recognition. Business writer Tom Egelhoff cites Walmart as an example. Having someone greet shoppers at the entrance was an employee suggestion. Employee involvement in the company is one of Walmart’s great strengths.
Talk to your banker
Your banker can show you techniques to help manage cash flow and streamline the payments process. He or she can offer guidance on controlling expenses, share methods for freeing up cash to grow your company, and show you how to offset some of the rising costs that come with any growing business.
Your banker is also a good source for industry trends and best practices learned from other clients.
Your accountant may have talked to you about fixed vs. variable expenses. Fixed expenses or costs are those that do not fluctuate with changes in production level or sales volume, such as rent, taxes insurance, dues and subscriptions, equipment leases, payments on loans, depreciation, etc.
Variable expenses, or inventoriable costs, change with production volume and company activity. Examples include raw materials, packaging, and labor directly involved in a company’s manufacturing process.
Seemingly rigid fixed expenses may the reduced through negotiation. For example, altering the length of a lease, buyout costs at the end of the lease, and other terms and conditions can reduce expenses.
Insurance costs may be reduced by adhering to safety directives and practices and changing the type of coverage.
Variable expenses can change radically from month to month, rising and falling with sales. Large payments that seemed doable when the order was placed may suddenly create a drain on resources.
Egelhoff suggests listing all of your variable expenses over the past three years, calculate the highest amount paid and the lowest amount paid for each period and keep it handy. When the bill for a variable expense comes across your desk compare it to the high and low for the corresponding time period. If the amount is out of line, do more investigating.
Expenses vs. investments
In an attempt to reduce expenses, many business owners turn first to cutting or eliminating marketing or advertising costs, which provides immediate relief. Egelhoff, however, says advertising or marketing that produces paying customers and brings in more than it costs is not an expense, it’s an investment.
Business cards, letterhead and envelopes belong under advertising expenses rather that office expenses. Those items still cost money, but contribute to an increase in sales. Office expenses such like staples and paper clips rarely increase the bottom line, Egelhoff says.
With proper planning a commitment – plus help from your accountant – you should be able to reduce your business expenses and keep them in check.
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